Zacks Industry Outlook Highlights: Alcoa and Aluminum Corporation of China

Zacks

For Immediate Release

Chicago, IL – September 06, 2013 – Today, Zacks Equity Research discusses the U.S. Mining, including Alcoa Inc. (AA-Free Report) and Aluminum Corporation of China Ltd (ACH-Free Report).
 
Industry: Mining
 
Link:  http://www.zacks.com/commentary/28873/Mining-Ferrous-&-Non-Ferrous-Stock-Outlook---Sept-2013
 
Mining - Non-Ferrous

Aluminum

Given its unique characteristics -- lightness, strength, flexibility, non-corrosive and infinitely recyclable -- aluminum is one of the most widely used metals. The world’s leading aluminum market is China, which accounts for over 40% of global aluminum consumption thanks to the rapid development and urbanization of China. Japan, Europe and the US are next in line in the aluminum market. Aluminum’s main markets are transportation, machinery and construction.

About the Industry

The aluminum industry is an extremely competitive and highly consolidated sector with 40% of global output commanded by the largest producers: Russia’s Rusal, Alcoa Inc. (AA-Free Report), Aluminum Corporation of China Ltd (ACH-Free Report) and Hydro Aluminum (part of the Norsk Hydro group).

The demand for aluminum in developed countries stems from the rapidly growing auto market. A strong focus on environment and strict restrictions on carbon emissions prompt the automakers to increase the energy efficiency of the vehicles.

Due to its lightness, aluminum makes cars more energy efficient, decreasing fuel consumption and cutting hazardous emissions. In developing countries, the construction industry is the biggest consumer of aluminum as these countries are expanding their infrastructure to satisfy the needs of a growing population.

Performance

Industry results suffered because of the decline in realized aluminum prices. Alcoa kicked off the second quarter earnings season with a revenue decline of 2%, affected by weak aluminum prices. Alcoa continued to see pricing pressure with London Metal Exchange (:LME) cash price falling 8% sequentially in the reported quarter.

Adaptive Measures to Combat Falling Prices

Following the decline in aluminum prices, BHP had to sale its 33.3% stake in the Guinea Alumina joint venture to Dubai Aluminum and Abu Dhabi state-owned Mubadala. In 2012, it had halted bauxite exploration at its Boffa-Santou-Houda site in Guinea and abandoned plans to build a smelter in the Democratic Republic of Congo.

Rio had earlier planned to sell its underperforming Pacific Aluminum, which has high-cost smelters in New Zealand and Australia and an alumina refinery. However, it had to abandon its plan after failing to find a buyer. Rio will incorporate Pacific Aluminum back under its larger aluminum umbrella, Rio Tinto Alcan group.

Prices have been under pressure, prompting companies to cut back on production. Aluminum prices have fallen to four-year lows and the market continues to be uncertain and volatile. Rusal, the world’s largest aluminum producer, reported losses in the first half of 2013 and announced that it will further reduce production by 357,000 metric tons (mt) in 2013, or 9% compared with 2012. Rusal plans to accelerate aluminum output cuts in the second half. Rusal is also contemplating production halts at its least efficient smelters and cut down production at certain smelters in Siberia.

Alcoa is aggressively slashing costs and pursuing strategies to move down its cost curves in its upstream businesses. The company remains committed to achieving its target of moving down the cost curve by 10 percentage points in smelting and by 7 percentage points in refining by 2015.

In May, Alcoa announced its plans to curtail 460,000 mt over a 15-month period of smelting due to falling aluminum prices and maintain cost competitiveness. In line with this, Alcoa announced closures or curtailments representing 269,000 mt, which included the permanent closure of 105,000 mt of capacity at Alcoa’s Baie-Comeau smelter in Canada and its Fusina, Italy, smelter representing 44,000 mt that was not part of the May review. Recently, Alcoa announced that it will close or curtail 164,000 mt of smelting capacity in the United States and Brazil.

Going Forward

Energy prices and other input costs are expected to pose challenges for the aluminum industry. In addition to the curtailments, the companies will step up activities to reduce the escalating cost of raw materials.

In the medium to long term, aluminum consumption is expected to improve on a global basis. The revival is palpable in the automotive and packaging industries, one of the key consumer markets. The automobile market is also becoming increasingly aluminum-intensive, benefiting from its recyclability and light-weight properties.

The global push to improve fuel efficiency in vehicles is expected to more than double the demand for aluminum in the auto industry by 2025. Further, the surge in substitute metals such as copper and zinc has triggered a switch among manufacturers to aluminum. Automobiles, air conditioners and industrial components manufacturers are now shifting their focus to the more economical metal.

To capitalize the growing aluminum demand for auto production, Alcoa recently broke ground on its $275 million expansion of Alcoa's Tennessee Operations. This marks Alcoa’s second automotive expansion to cater to the car makers. The previous one was a $300 million expansion of Alcoa's Davenport, IA plant that has already begun commissioning and is set to be completed by the end of 2013.

We expect aluminum demand to increase over the next three years, outstripping supply growth. Following China, India also holds promise as its current low level of aluminum consumption and high urban population growth make a favorable combination. As a result, the aluminum market is likely to witness deficits for a prolonged period and creates the backdrop supportive of high alumina and aluminum prices.
 
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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